BILL ANALYSIS                                                                                                                                                                                                    Ó



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          ASSEMBLY THIRD READING
          AB 2514 (Bradford)
          As Amended  May 1, 2012
          Majority vote 

           UTILITIES & COMMERCE              11-0              
          APPROPRIATIONS      17-0        
           
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          |Ayes:|Bradford, Buchanan,       |Ayes:|Fuentes, Harkey,          |
          |     |Fuentes,                  |     |Blumenfield, Bradford,    |
          |     |Bonnie Lowenthal, Gorell, |     |Charles Calderon, Campos, |
          |     |                          |     |Davis, Donnelly, Gatto,   |
          |     |Roger Hernández, Knight,  |     |Ammiano, Hill, Lara,      |
          |     |Ma, Nestande, Swanson,    |     |Mitchell, Nielsen, Norby, |
          |     |Valadao                   |     |Solorio, Wagner           |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           SUMMARY  :   Requires the California Public Utilities Commission 
          (PUC) to complete a study on the cost of net energy metering 
          (NEM) to ratepayers.  Specifically,  this bill  :  

          1)Requires PUC to complete a study by June 30, 2013, to 
            determine the extent to which each class of ratepayers and 
            each region of the state receiving service under the net 
            energy metering tariff is paying the full cost of the services 
            provided to them by the investor owned utilities.

          2)Requires PUC to report on the extent to which customers 
            receiving net metering pay their share of the costs of public 
            purpose programs, and the benefits of net energy metering.

          3)Requires the commission to report the results of the study to 
            the Legislature within 30 days of its completion.

           EXISTING LAW  :  
           
          1)Requires nearly every utility in California to provide a net 
            metering rate to customers connecting renewable energy 
            projects to utility service equipment until the total 
            renewable capacity equals no more than 5% of each utility's 
            aggregated peak electricity demand.








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          2)Requires payment for excess electricity generation to be 
            credited to the customer's utility account at the retail rate 
            of electricity based on the customer's applicable tariff.

          3)Exempts net metered utility customers from payment of some 
            otherwise nonbypassable utility service charges.

          4)Requires nearly every utility in California to provide a 
            connection to the electricity grid within 30 business days.

           FISCAL EFFECT  :   PUC is in the process of awarding a contract 
          for an NEM cost/benefit study, has allocated up to $250,000 for 
          this purpose, and anticipates that this study will be well along 
          by the time this bill would become effective.  PUC indicates, 
          however, that the pending study does not include all of the 
          parameters specified in this bill-specifically evaluating the 
          costs and benefits by region and performing the analysis using 
          specific definitions of peak demand and generation capacity.  
          Therefore, a subsequent study based on this bill will entail 
          additional one-time special fund costs, potentially in the range 
          of $100,000.

           COMMENTS  :   

           Statement of Need  .  Net metering is a popular program that has 
          helped build an active solar photovoltaic industry in 
          California.  When net metering was first authorized by the 
          Legislature 14 years ago, we recognized that net metering had 
          costs associated with it but that those costs were worth it 
          because we would be bringing jobs, economic opportunity, and 
          ratepayer benefits through this policy.  Clearly a lot has 
          changed.  Photovoltaic (PV) modules are selling below $1 per 
          watt, installed costs have dropped to historic lows, the 
          California Solar Initiative (CSI) is on track to meet its goals 
          by 2016, and utility solar generation contracts are coming in at 
          less than nine cents per kilowatthour while some NEM customers 
          are getting more than four times that amount.  It is time to 
          take a look at where we are and see if there is a way to make 
          sure that NEM can be a sustainable program.  Some suggest the 
          best answer is to make it a generation-only rate, others suggest 
          full retail and nothing else, and there are variations in 
          between.  With so much progress, it is logical to consider 
          reforming NEM subsidies.  But to understand how to reform NEM it 








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          is important to understand the costs and benefits of NEM.  Until 
          then, changing NEM, raising project size caps and total capacity 
          caps and adding charges cannot be done without risking ratepayer 
          backlash because of the cost or stymieing the growth of this 
          in-state industry.

           Background  .  Under net-metering, the electric utility is 
          required to "buy back" all electricity generated by a 
          customer-owned generator that is not consumed by the customer 
          on-site.  The price is set by the applicable retail rate under 
          the customer's existing contract.  When the customer generates 
          electricity, he/she uses most of it for his or her own facility. 
           At the end of each 12-month NEM period, the electric 
          corporation calculates the amount of electricity distributed to 
          the grid by the customer and reduces the customer's annual bill 
          by the amount of electricity generated by the customer.  If the 
          customer consumes more electricity than their facility generates 
          the utility calculates a bill based on the net consumption of 
          utility delivered kilowatthours.

          This NEM statute allows the credit at the customer's retail 
          price - a price that is much higher than the generation costs 
          because the retail price includes non-generation charges, 
          including but not limited to transmission and distribution 
          service, the California Rates for Energy (CARE) subsidy, public 
          good charges, and service charges for billing and customer 
          service (Note that transmission and distribution service charges 
          include, among other things funding for PUC and California 
          Independent System Operator (CAISO), and utility return on 
          investment).  If the customer-generator is being paid the retail 
          price, the non-generation costs are shifted to the utilities' 
          other ratepayers.  There is another NEM statute for Fuel Cell 
          projects that provides a similar credit based on the generation 
          only rate.  The Fuel Cell NEM customers using this statute pay 
          their service charges and there is no cost shift to other 
          ratepayers.  Some commercial customers, but not all, will pay 
          demand charges, irrespective of NEM credits.  The demand charges 
          may be assessed during periods when the renewable project is 
          operating, thereby offsetting these charges.

          NEM is available to all utility customers, including 
          residential, commercial, industrial, agricultural, and 
          government.









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           NEM customers are not 'off the grid.'   They are connected to the 
          utility services and use utility services at any time the 
          on-site generation facility is not operating.  For customers 
          with solar generation, these will be nighttime, during inclement 
          weather, or when the generation facility is out of service.

           Fixed costs and variable costs  .  PUC determines the rates to be 
          assessed all customers served by investor owned utilities (IOU). 
           These rates include fixed and variable costs.  Fixed charges 
          include public purpose programs, transmission and distribution 
          services, funding for PUC and CAISO, local utility user taxes, 
          low income subsidy programs, and other charges. The extent to 
          which a NEM customer has avoided fixed costs of utility 
          services, while still using utility services means that those 
          costs must be shifted to another ratepayer.

          Fixed costs are applied as a volumetric charge assessed on each 
          kilowatthour of energy used by the customer.  With NEM, the 
          customer is billed for net kilowatthour usage, that is, those 
          kilowatthours provided by the utility after deducting excess 
          kilowatthours generated by the customer.  This reduces the fixed 
          charges that would have otherwise been paid for by NEM 
          customers.

          In addition to this subsidy by non-NEM customers, non-NEM 
          customers also pay for the cost of utility safety inspections 
          and any electricity distribution upgrades that may be necessary 
          to ensure safety and reliability because of the total generation 
          added to the distribution system.

           The expected cost-shift to other ratepayers is not currently 
          quantified for all ratepayers  .  The most recent study by PUC, 
          published in 2010, estimated that "PV generation on NEM tariffs 
          (386 megawatts (MW) installed through 2008) will result in a net 
          present value cost to ratepayers of approximately $230 million 
          over the next 20 years."  Since then, the total MWs 
          interconnected has more than tripled and electricity rates have 
          changed.  PUC study did not estimate cost differences between 
          different classes of customers, i.e., commercial and residential 
          customers, nor did it quantify the cost of interconnection 
          inspections.

          While this bill does not apply to the Publicly Owned Utilities 
          (POUs), it is useful to point out that no study of cost shifting 








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          has been done for POU's.  Note that NEM statute applies to every 
          POU except Los Angeles Department of Water Power (LADWP).

           Quantifying the benefits  .  Since the last PUC NEM study, PUC has 
          also done extensive research on distributed generation (for both 
          the Feed in Tariff and Reverse Auction programs).  Two recent 
          studies show that location and local electricity demand are, 
          among other things, important considerations as to whether a 
          self-generation facility benefits other ratepayers.  The studies 
          also show potential cost impacts as well.  PUC should include 
          this kind of data and analysis in this NEM study.

          PUC has also identified other benefits of self-generation, 
          including displacement of electricity demand during periods of 
          peak electricity demand, when cost of electricity is typically 
          highest.  Most people think of peak demand in the summer, when 
          reliance on air conditioning is at its highest.  Peak demand is 
          not uniform throughout the state and in some areas, peak demand 
          occurs in the winter.  For example, a study by the California 
          Energy Commission (CEC) found that the Alameda Power (a POU 
          located near Berkeley) is a winter-peaking utility, when cost of 
          electricity is typically low.  Some regions served by IOUs may 
          also have winter peaks.  Summing all of NEM generation and 
          assigning a value that is based on summer peak electricity 
          pricing may not be providing an accurate assessment of costs and 
          benefits.  PUC maintains an extensive database on the 
          performance and location of solar projects receiving solar 
          rebates.  This database can provide meaningful information that 
          can be disaggregated regionally to help provide insights into 
          where most projects are being placed and whether those locations 
          are in areas that PUC's studies on distributed generation (DG) 
          have identified as being valuable to the grid.

           Can the electrons flow out from one project and provide 
          electricity to another customer  ?  NEM projects are equipped with 
          bi-directional meters that count the flow of kilowatthours to 
          and from a utility customer.  With respect to where electricity 
          that flows 'back to the grid,' there is no way to know where 
          that electricity was discharged.  It cannot be said with 
          certainty that the power flowed to the neighbor because one 
          cannot say whether the neighbor was drawing any power at the 
          moment the electricity became available.  In any case, the 
          transformers and substations are not bi-directional so any 
          electricity that flows onto the grid from a customer-generator 








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          will be limited to a confined area.  On weekends, electricity 
          demand is typically substantially lower than on weekdays, so 
          that extra electricity may have little or no value.  In any 
          case, PUC should quantify the extent to which excess electricity 
          from a NEM customer is reducing cost of electricity that would 
          otherwise be purchased by the utility to provide to both non-NEM 
          and NEM customers.

           NEM Capacity Cap  .  PUC is currently considering revising the 
          method that has been used to calculate the cap.  Solar industry 
          organizations have asked that the method to calculate the cap be 
          revised to allow more capacity to be installed under the current 
          cap.  Their proposal would more than double the subsidy.   In 
          2010 the Legislature approved AB 510 (Skinner), Chapter 6, 
          Statutes of 2010, which raised the maximum NEM cap to 5% so that 
          all of the projects authorized by SB 1 (Murray), Chapter 132, 
          Statutes of 2006, to receive ratepayer-funded incentives can 
          also receive NEM.  The purpose of the cap was to ensure that 
          there are limits on the amount of cost-shifting to non-NEM 
          customers.

          In evaluating program costs and benefits for purposes of the 
          study, the bill requires PUC to use the peak demand reported in 
          the utility's Form 1 filing with the Federal Energy Regulatory 
          Commission (FERC) and the sum of the individual NEM customer 
          capacity is based on CEC-AC rating.  (Both of these values are 
          generally accepted by utility and renewable energy industries 
          and are publicly available.) 

          The current PUC action to double the allowed capacity under the 
          current cap does not comport with the Legislature's consistent 
          interest in controlling the costs for NEM.  The appropriate 
          method for adjusting the capacity would have been to seek 
          Legislative approval. The current capacity of installed and 
          pending solar projects is substantially below the current cap, 
          thus there is no pressing urgency for raising the cap 
          administratively without Legislative consideration.


           Analysis Prepared by  :    Susan Kateley / U. & C. / (916) 
          319-2083


                                                                FN: 0003933








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